Move Smartly: Rent-to-Own Deals Can Be Risky Business | Toronto Real Estate Blog

Rent-to-Own Deals Can Be Risky Business

Bob Aaron in Home Buying, Legal

Last month I received an email from a firm billing itself as a “very successful real estate investment firm that invests heavily in something called rent-to-own.”

The e-mail offered several “hot deals” that were “going fast.” Three were on behalf of “high income” tenants now looking to buy a home in or near Toronto, and one was an offer to sell a “premium Mississauga lakeshore rental” home with tenants already in place.

The offers promised annual returns of 20.98 to 26.72 per cent to investors who would buy the properties and lease them to tenants with an option to purchase at a fixed price anywhere from one to five years down the road.

The rent-to-own option is also known as lease option. It consists of an agreement which combines a lease with an option to purchase at some time in the future.

The concept is said to appeal to tenants with a problematic credit score, but enough cash on hand (say $10,000) to pay for the option. The investors use the tenant’s option fee as part of their down payment and collect “above market” rent until the tenant is in a position to obtain financing and purchase from the investors.

Tenants can lock in a purchase price in a rising market and can freeze their rental payments for as long as five years.

The pitch to investors is that they can invest in rent-to-own properties which offer “low risk, high returns, hands-off investments that build substantial wealth fast.”

Unfortunately, that’s simply not true. The rent-to-own concept presents significant risk both to sellers/landlords and buyers/tenants.

Perhaps the most significant challenge is that there are no standard lease purchase agreement forms accepted by the real estate industry, and the commonly-used templates that I have seen in my practice leave a great deal to be desired.

Trying to determine an option price for a transaction taking place in three to five years in the future is largely guesswork. If the price is too high on the option date, the buyer will back out, and if it’s too low, the seller will walk away for potential additional profit.

As well, tenant buyers may be paying more than market rent so that each month some money will be credited against the eventual purchase price. If the buyer backs out at the expiry of the lease option, he or she will lose the option fee and any monies paid along the way as a credit against the purchase price.

Buyers may also be exposed to unlicensed real estate agents like the ones who sent me the marketing email last month, or to unscrupulous sellers. Back in September, 2008, the Toronto Star reported on Solution Homes, the operators of a rent-to-own scheme who leased houses from desperate sellers, subleased them to tenants, pocketed the rents without making mortgage payments, and left the tenant buyers to be evicted by the mortgage lenders.

For investor sellers, the worst case scenario is when the tenant buyer goes into default. The Landlord and Tenant Board has ruled that it does not have jurisdiction to evict a defaulting tenant who has an option to purchase. Power of sale and foreclosure proceedings cannot be used, and landlord sellers are forced to take defaulting buyers to Superior Court to evict them and terminate the option agreement. This is what happened in the case of Novotny v. Fowler in 2009 (see where the parties retained lawyers and experienced significant delay and expense to unwind their rent-to-own deal when the buyer defaulted.

In his 2010 book Investing in Rent-to-Own Property, Mark Leoffler significantly downplays the risks involved in a worst-case scenario. His simplistic answer, for example, to the defaulting tenant problem is to check out the tenant’s credit and require post-dated cheques for the entire term, which is prohibited under Ontario law.

Rent-to-own is not for everyone. For both sellers and buyers it involves a significant amount of risk. Participants in the program should only deal with licensed real estate agents and with real estate lawyers who are familiar with the concept.

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Bob Aaron is a sole practitioner at the law firm of Aaron & Aaron in Toronto and a board member of the Tarion Warranty Corp.  Bob specializes in the areas of real estate, corporate and commercial law, estates and wills and landlord/tenant law. His Title Page column appears Saturdays in The Toronto Star and weekly on Move Smartly.  E-mail

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Many Toronto Public Library branches at risk of closure | Toronto Real Estate Blog

Many Toronto Public Library branches at risk of closure are in wards of Council’s Executive Committee members, analysis shows

TORONTO, July 26, 2011 /CNW/ – If the Executive Committee of Toronto City Council votes to close library branches, how will it be decided which ones to close? That is the question that moved the union that represents city library workers to analyze branch circulation figures in an effort to identify those most at risk.

In last February’s City Council vote to close the downtown Urban Affairs Branch, low circulation (73,121 in 2010) was cited as the main reason for its shutdown. There are currently four additional library branches with even lower circulation, including the Sunnybrook branch that serves war veterans in Ward 25 (Councillor Jaye Robinson). But closing just four small branches will not come close to meeting Mayor Ford‘s goal of a 10 per cent cut in city agency expenditures. Several more would have to be closed to meet that target.

The analysis of the 2010 circulation statistics of Toronto Public Library (TPL) branches (see attached table) shows there are 32 of the remaining 98 TPL branches with circulation under 200,000 items, presumably among the most at risk, depending on their potential real estate values. Fourteen of these branches are in the wards of members of the Executive Committee.

If just the 23 branches under 170,000 circulation were closed, all libraries would be closed in the wards of Executive Committee members Doug Ford (Ward 2), Cesar Palacio (Ward 17), Giorgio Mammoliti (Ward 7) and Frances Nunziata (Ward 11). If all 32 under 200,000 circulation were closed, the wards of additional Executive Committee members would be affected: Paul Ainslie (Ward 43), Doug Holyday (Ward 3), Peter Milczyn (Ward 5), Denzil Minnan-Wong (Ward 34) and Jaye Robinson (Ward 25).

“We don’t know how the closure decisions will be made but it is not going to be an easy task, politically speaking,” says Maureen O’Reilly, President of the Toronto Public Library Workers Union Local 4948.

“If it is done strictly by circulation, residents in the Executive Committee’s wards will suffer the most because those councillors strongly support the Mayor’s cost cutting agenda and would have no other choice but to vote to close those libraries. If only the lowest 14 branches are closed, Councillor Doug Ford’s residents will have no libraries. This will presumably make Mr. Ford happy based on the comment he made to CFRB last week about there being too many libraries in his ward compared to doughnut shops.

An early July poll by Forum Research showed that 74 per cent of Toronto residents were opposed to closing library branches as a measure to help address the city’s budget deficit.

Toronto Public Library 2010 Circulation Statistics:  Branches Under 200,000


  Branch/Service Circulation Councillor Ward
1. Sunnybrook 42,275 Robinson 25
2. Swansea 42,554 Doucette 13
3. Todmorden Room 42,897 Frajedakis 29
4. St. Clair Silverthorn 61,939 Palacio 17
5. Perth Dupont 79,683 Bailão 18
6. Northern Elms 96,328 Ford 2
7. Humber Summit 100,009 Mammoliti 7
8. Evelyn Gregory 100,799 DiGiorgio 12
9. Queen Saulter 107,877 Fletcher 30
10. Victoria Village 116,689 Minnan-Wong 34
11. Oakwood 121,412 Colle 15
12. Humberwood 124,093 Ford 2
13. Taylor 124,126 Crawford 36
14. Rexdale 124,331 Ford 2
15. Davenport 126,843 Mihevc 21
16. Mount Dennis 130,403 Nunziata 11
17. Black Creek 136,098 Mammoliti 7
18. New Toronto 148,408 Grimes 6
19. Long Branch 149,121 Grimes 6
20. Weston 153,907 Nunziata 11
21. Jane Shepherd 154,988 Augimeri 9
22. Guildwood 157,947 Ainslie 43
23. Dufferin St. Clair 168,824 Palacio 17
24. Amesbury Park 171,599 DiGiorgio 12
25. Humber Bay 173,912 Milczyn 5
26. Jones 174,942 Fletcher 30
27. Elmbrook Park 177,051 Holyday 3
28. Alderwood 179,258 Grimes 6
29. Mount Pleasant 180,161 Matlow 22
30. Armour Heights 190,824 Stintz 16
31. Mimico 190,944 Grimes 6
32. Palmerston 199,021 Vaughan 20




For further information:

Maureen O’Reilly, 647-206-7457


New real estate companies challenge old guard | Toronto Real Estate Blog

New real estate companies challenge old guard

Published On Mon Jul 25 2011
Natalie Armata founded, one in a new wave of innovative real estate options. Her site allows buyers to let owners know they're interested in a home, even if it isn't for sale.

Natalie Armata founded, one in a new wave of innovative real estate options. Her site allows buyers to let owners know they’re interested in a home, even if it isn’t for sale.


Tony Wong Business Reporter


Al Kula wants to sell his home. Not now, mind you, but in another two years.

He’s hoping to sell privately and would rather not pay real estate commission fees. So he listed his north Toronto home with, a website launched in May that allows vendors to place their properties up for future sale.

“I plan to retire in another couple of years and I thought it was a great idea,” said Kula, 66, a pharmacist. “I like to plan ahead.”

In the wake of a move by the Competition Bureau to open up the real estate market to more competition, a wave of new, innovative companies have launched. The entrants can be as esoteric as, as cutting edge as a company that matches consumers to agents for lower fees, to more traditional flat fee services where consumers can list on the MLS for a cheaper price.

Most are small start ups going head-to-head with organized real estate in the battle for consumers.

“I think people have been sitting on the sidelines waiting for the market to open up and they have seen the writing on the wall,” said John Andrew, director of the executive seminars on corporate and investment real estate at Queen’s University. “This kind of competition is ultimately good for the industry and good for consumers. This is exactly what the Competition Bureau wanted.”

The Competition Bureau has launched actions against the Canadian Real Estate Association and more recently against the Toronto Real Estate Board in an effort to open up the industry to more competition.

While real estate commissions are negotiable, traditional realtors have charged about 5 per cent to sell a home. That could work out to $20,000 in fees on a $400,000 property.

While many of the start ups are launched by entrepreneurs with no previous experience in the business, some are led by established realtors who say fees are too high.

Realtor Mia Prime said she launched her flat fee service last week because “commission fees are out of whack.”

After 30 years in the business selling homes, Prime said technology has allowed agents to be much more efficient and the workload is less.

“I can do deals today sitting at home in my underwear. I couldn’t do that 30 years ago. I didn’t have a cellular phone, I didn’t have email. We worked for our money and that was when the average price of a house was a lot cheaper.”

Since then home prices have exploded, commission rates have stayed about the same, and technology has allowed agents to be more efficient, says the realtor.

“I don’t believe in gouging people,” said Prime. “Selling your home can be hard work, but it’s not magic.”

Prime’s Great Canadian Realty lists properties on the Multiple Listing Service for $995 including giving vendors a market analysis of their home. If the vendor requires more help, such as an agent to show the home, they can add that on for an additional fee.

“I think there is a prevailing notion that sometimes agents get paid too much,” said Andrew Brest, who along with realtor partner Lee Redwoood formed, a site which matches realtors with consumers. “Consumers really want to be in the driver’s seat.”

Taking a cue from dating sites such as and Lavalife, the site allows buyers or sellers to connect anonymously with agents and negotiate commission rates and services before meeting face to face.

“Consumers are shy in asking agents for a break in commission, so this prevents that red-faced moment,” said Redwood.

While the site is free to consumers, agents pay a $499.95 annual membership and a $50 per contact charge., meanwhile, is more along the lines of, but coming from a buyer’s perspective.

“This is the digital equivalent of putting a note under someone’s door and saying ‘I love your home, do you want to sell it?’ ” said founder Natalie Armata.

The website, which went live last week, aims to connect buyers to neighbourhoods, streets, or even certain homes that they really want to own. It also integrates mapping software allowing users to pinpoint areas they want to search, including statistical information on the neighbourhood.

“Most people only have a few neighbourhoods or even streets that they really love,” said Armata. “Some people are very specific in their tastes and profile and sometimes there just isn’t the home they want currently for sale.”

If a buyer sees a home that they want, they place a post on the website, and for a small additional fee, a postcard is also sent to the home to notify the homeowner.

Queen’s University professor Andrew says the gush of entrepreneurship is reminiscent of the early technology boom in Silicon Valley.

“Some are IT start ups who are still trying to figure out how to make money. And the reality is a lot of these guys won’t make it,” said Andrew. “But that’s the nature of the beast, that’s what competition is about.”

Mike Roelofsen hopes he’ll still be around. He believes his site,, has global potential.

Like many ideas, this one came about by accident.

While he was in the driveway of his St. Thomas condo washing his car, a few years back, a couple drove by and asked if any of the units were for sale.

“I said no, because there was very little turnover at the place,” said Roelofsen. “But then I figured I should have taken his number down because I was thinking of selling down the road. I could have sold privately and avoided the real estate fees.”

Roelfson is allowing the first 1,000 vendors to list for free to get traffic on his site, and is then charging a fee of $79.

So far the new entrants have provided very little challenge to the established order of branded realtors who control the vast majority of the market. If history is a guide, many of the start ups will go under, while others will have to consolidate and bulk up to take on the big players.

“Like other very large transactions that are seldom done, consumers tend to look to professionals who do it every day,” said Phil Soper, president and CEO of Royal LePage, which represents more than 14,000 licensed realtors in Canada.

In the United States, where new start ups have been around longer, organized real estate still controls the lion’s share of the market over the newer entrants. In Canada, Soper says market share by organized realtors have remained stable.

“Part of the reason is that it is difficult to reach a critical mass to get major market share because Canada is a relatively small market with huge geography,” said Soper. “There has always been an intrepid group willing to do it themselves, but the question is how much market share will that ultimately result in?”

In a down or flat market, which most analysts are forecasting for the next couple years, consumers tend to stick with professionals, said Soper.

“If the market goes down it becomes more challenging for the do it yourselfers and they tend to need the help of a professional,” said Soper.

Roelfson, meanwhile, says he’s not looking to dominate the market. But a slice of market share could result in a profitable run.

He says about 85 people have listed on his site in the last couple months.

“Like anything else, this will take time to see if consumers will respond,” said Roelfson. “Not everything will work. But you only need one Facebook in the market to change the game.”


Home price index rises for sixth month in May | Business | Toronto Real Estate Blog

Home price index rises for sixth month in May

Wed Jul 27, 2011 11:18am EDT



TORONTO (Reuters) – Home resale prices in Canada notched their biggest monthly rise in May since last July, according to the Teranet-National Bank Composite House Price Index released on Wednesday. 


The index, which measures price changes for repeat sales of single-family homes in six metropolitan areas, showed overall prices were up 1.3 percent in May from April, the second straight monthly gain of 1 percent or more. It was also the sixth straight monthly gain.


Vancouver and Toronto, already expensive markets, were the price-gain leaders, up 1.6 percent and 1.7 percent, respectively.


The Vancouver market was especially heated in the spring as buyers tried to get in ahead of the implementation of tougher mortgage rules in mid-March.

Time lags between the actual home sales and their entry into public land registries may account for the large gains in April and May after the mortgage rules were already in effect, the report said.

“This spike in activity is now behind us. Therefore, the recent large monthly rises in home prices in Canada should not be a lasting trend,” said Marc Pinsonneault, senior economist at National Bank Financial.

Data from the Canadian Real Estate Association for June showed slowing sales in Vancouver and a trend toward slower sales nationally.

Economists at TD Bank and Royal Bank of Canada have recently forecast cooler housing markets over the next year or two, a view that is widely held by market watchers as the stricter mortgage rules and the anticipation of higher interest rates dampen demand.

Other Canadian markets in the Teranet index registered strength in May. Montreal prices rose 0.7 percent from April and Ottawa was up 0.5 percent. Calgary prices were up 0.6 percent, and Halifax eked out a 0.1 percent rise in the month.

Overall prices were up 4.4 percent from a year earlier.

The report did not provide actual prices.

(Reporting by Ka Yan Ng; Editing by Peter Galloway)




Our Parents’ First Mortgage

Our Parents’ First Mortgage

Homeownership-cost-and-affordability81% of Ontarians say it’s more difficult to own a home now than it was for their parents. That comes from this Ipsos Reid/Ontario Real Estate Association survey.

That’s interesting because our parents had to put down 25% to purchase a home. Young buyers nowadays can get their foot in the door with just 5% down.

On the other hand, monthly payments are tougher to swallow today, even with longer amortizations. (We know RBC’s affordability report finds differently, but it assumes 25% down, which is a chore for today’s more indebted young buyers).

If you’re a twenty-something who’s home shopping, here’s a look at what your folks might have paid to buy their first house 25 years ago.

In 1984, the average minimum mortgage payment would have been roughly $628, or 18% of a married couple’s gross income, based on a:

  • $77,342 average house
  • $41,348 median couple’s income
  • 25% down payment
  • 12.74% five-year fixed rate
  • 25-year amortization

In 2011, the average minimum mortgage payment is about $1,622 or 25% of a married couple’s gross income, based on a:

  • $372,700 average house
  • $77,198 median couple’s income
  • 5% down payment
  • 3.69% five-year fixed rate
  • 30-year amortization

Mortgage-payments-to-incomeKeep in mind, the above is only meant to compare the “minimum” mortgage commitment required to buy the average house in 1984 vs. 2011.

It’s a different story if you’re a first-time buyer who has been diligent enough to save 25% of your purchase price. In that case:

1)  We’d like to shake your hand; and,
2)  Your payments would be only marginally less affordable than your parent’s payments 25 years ago (i.e., 20% of a couple’s income today, versus 18% in 1984—based on real income).

Regardless of how you slice and dice it, it is harder for many young people to afford a home today, as OREA’s survey suggests. That’s true despite drastically lower interest rates, smaller down payments, and longer amortizations.

Note, however, that we say “many” in the preceding paragraph and not “all.” That’s because affordability ultimately depends on where you’re buying. CREA’s current $372,700 average home price is materially skewed by Vancouver and Toronto. Young buyers who don’t live near a major downtown core may find mortgage carrying costs far more tolerable.

Date sources: Home prices: CREA. 1984 Median income (married couples): StatCan, deflated from 2009 dollars. 2011 Median income (married couples): StatCan, inflated from 2009 dollars using 2% annual wage growth estimate. Five-year fixed rate in 1984: Bank of Canada.

Rob McLister, CMT

Scotia Changes its Progress Draw Mortgage | Toronto Real Estate Blog | #Toronto #realestate

July 25, 2011


Ottawa tightens tax rules on hybrid investment product | Toronto Real Estate Blog

July 20, 2011

Ottawa tightens tax rules on hybrid investment product

Globe and Mail Update

REITs among those targeted in crackdown against stapled securities

Ottawa has moved to tighten tax regulations in response to investment entities that it says are designed to circumvent its income trust policy.

Several businesses listed on the Toronto Stock Exchange took a hit on Wednesday as a result, with units of InnVest REIT INN.UN-T tumbling 15 per cent, units of Westshore Terminals Investment WTE.UN-T falling 7 per cent and the units of Labrador Iron Ore Royalty LIF.UN-T dropping more than 4 per cent.

In October 2006, the federal government announced that it would impose a tax on cash distributions to unitholders of income trusts as a means to level the playing field between trusts and regular companies. It called the new policy the Tax Fairness Plan.

Since the changes took place at the beginning of this year, investors hungry for high-yield returns have scrambled to find alternative products. One type of investment that has proved popular is stapled securities, which involves two separate products that trade together.

Stapled securities can tie together equity and debt instruments, a structure which until now could offer tax advantages similar to those of earlier income trusts. Because interest payments on business debt are deductible for income tax purposes, an entity could use the interest on the note to shelter part of the income of the company. Under the new rules, a company or trust will no longer be able to deduct the interest paid on the debt portion of the stapled security.

“These proposed measures will ensure that the policy objectives of the Tax Fairness Plan continue to be met,” Finance Minister Jim Flaherty said in a news release. “They also reflect our government’s ongoing commitment to address structures that frustrate those policy objectives.”

The government is also targeting some REITs with the amendments.

To qualify as a REIT, a business can only have passive income from its properties and not operating income. That means a REIT can own the land and buildings of a hotel but cannot operate the hotels itself. One way REITs have got around this rule is by putting operations into another company which leases the hotels from the REIT. The shares of the new operating firm can then be “stapled” to the units of the REIT. The new rules will remove the advantage of this structure.

There are only a handful of businesses that will be affected by the government’s clamp down, says Stephen Pincus, a senior partner at Goodmans LLP specializing in corporate finance and M&As, but Ottawa is clearly moving to prevent a bigger trend. “The government made these changes because they had a concern that there might be other entities that might want to use this sort of structure,” he said.

While the government is trying to make the rules “as pure as possible,” it is making them narrower than they are in other countries, which is unfair to Canadian investors, Mr. Pincus said.

He thinks the proposals go too far in respect of REITs, pointing out that other countries allow real estate businesses to separate their operations and still deduct rent payments. As a result, more Canadian investors will be attracted to more favourable investment conditions in the United States, Australia and other countries, he said.

The government’s move was not surprising, said Sheryl Purdy, vice-president and investment advisor with Leede Financial Markets Inc. in Calgary. “The original legislation left the door open, saying that if something comes up that they perceived frustrates the policy objectives then they will tweak it. In this case that’s what the government is doing, they are tweaking the legislation.”

Ms. Purdy says she kept clients away from the hybrid products, turning instead to Canadian high-yield bonds. “You can push the envelop if you want, but the reality is your clients may pay for it later on if the government acts retroactively,” she said.

The government is imposing varying transition periods. For example, a business that issued stapled securities prior to Oct. 31, 2006 will have until Jan. 1, 2016 to fix their structures. Those who issued stapled securities after October 2006 will have one year to change their structures.